A Look into the Markets - September 20, 2024

by Geri And Tim Penner

This past week, the Federal Reserve cut the Fed funds rate and issued a fresh outlook on the economy and rates. Let's break it down and talk about the week ahead.

"You've been Thunderstruck" - Thunderstruck by AC/DC.

The Fed Goes Big

On Wednesday, the Federal Reserve somewhat surprised the market by cutting the Federal funds rate by 0.50% to a level of 4.75 to 5%. This was the first rate cut since the pandemic and the largest initial rate cut (0.50%) since the Great Recession. The Fed decided to cut rates by a larger 0.50% amount because they see inflation moving lower towards their target, and they want to prevent further weakness in the labor market.

Fed Forecast

In addition to cutting rates, the Fed issued their summary of economic projections. This is where they revise their outlook on GDP, inflation, the unemployment rate, and the outlook for the Fed funds rate which they just cut. Here's what we learned: Since the previous forecast 90 days ago, the Fed now sees economic growth coming in slightly lower than expected. They see the unemployment rate coming in higher than previously expected and they see inflation coming in slightly lower than expected. Instead of forecasting one rate cut (like they did 90 days ago), they saw four 0.25% rate cuts, two of which they did on Wednesday. In his press conference, Powell reiterated that the path of rates is not set in stone and will be based on the data. If conditions cool further, we could see even more rate cuts; the opposite is true.

Not Unanimous

It is important to note that not all Fed members agree on cutting rates. Fed official Michelle Bowman preferred to cut rates by only 0.25 basis points at this meeting. This is the first dissenting vote in nearly 20 years.

Rate Cut Impact

It is important to remember: A cut in the Fed funds rate has no direct impact on mortgage rates. The Fed funds rate impacts short-term rates like auto loans, home equity lines of credit, and credit cards. It will also have an impact on the savings rate of your bank account. Home loan rates are mainly driven by the overall outlook of the economy and inflation. Leading into this Fed meeting, home loan rates have already edged down to the lowest level in 19 months, in anticipation of the Fed rate cut. With the markets forward-looking, it remains to be seen if and how much lower home loan rates can get.

Bottom line: Home loan pricing has steadily improved since April in anticipation of the Fed cutting rates and the overall economy slowing. How much better rates will get in the near term is anyone's guess, and further improvement may rely on incoming economic reports.

Looking Ahead

Next week may very well determine if the trend of lower rates remains intact. The Fed's favored gauge of inflation (the Core PCE) will be reported on Friday. If it comes in soft, home loan rates would welcome the reading; the opposite is true. We also have a reading on our gross domestic product as well as several auctions. And if that were not enough, we have Fed officials speaking on the outlook of the economy and rates, all of which can be market-moving.

Mortgage Market Guide Candlestick Chart

Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.0% coupon, where currently closed loans are being packaged.

As prices move higher, rates decline, and vice versa. If you look at the right side of the chart, you can see how the price gains during September stopped at the Fed rate cut. This means rates stopped improving once the Fed cut.

Chart: Fannie Mae 30-Year 5.0% Coupon (Friday, September 20, 2024)